There are two ways to sell or buy a business: asset or stock. There are major differences between each approach and you should carefully consider the following objectives before inking a deal.
An asset-based deal tends to favor the buyer because the purchased assets can potentially generate substantial tax deductions. These deals also work best when licenses, copyrights, trademarks or franchises aren’t involved. In the accounting world we call these “intangibles” and usually these invisible assets are not-transferable to new owners leaving a purchase of the existing business’ stock as the only option. Let’s assume you’re purchasing a local plumbing business but the name is of little value. By purchasing the tools, vans, equipment and inventory you’re able to capture some great tax write-offs from the word go. But let’s say you’re purchasing a restaurant that holds a liquor license in a municipality that is no longer approving new liquor licenses and they’re not transferable. Now you want to own the business that owns the liquor license. This is where a stock purchase is great.
A stock-purchase deal tends to favor the seller because selling stock (as opposed to depreciated property) has favorable tax rates. If you’re interested in carrying the buyer’s note for a while then a stock sale allows you to hold a loan on the sale proceeds without creating a major tax consequence. PITFALL ALERT: selling depreciable property on installments means you have to pay tax on the entire sale in year one even though you’ll be collecting the sales price over time. Sale the stock of the business instead and then you’ll be able to pay tax on the gain as you receive payments instead of the entire sale being taxes in the first year. PITFALL ALERT: purchasing the stock of an existing business means you are stepping into the same shoes of the existing owner. All known and unknown liabilities and obligations become yours as the owner. Any attorney worth their fee will make sure certain “discovery language” is included in the purchase agreement but it’s still not immunity from liability.
In summary, buyers tend to benefit more from asset-based purchases and sellers tend to benefit more from stock-based purchases. This is just the tip of the iceberg so if you want to dive deeper send us an email!